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Confusion reigns in the wake of ruling by European Commission

By EPI editorial May 1, 2008

Dealing a heavy blow to MasterCard, the European Commission (EC), the executive branch of the European Union (EU), has ruled that its multilateral interchange fees (MIF) for cross-border payment card transactions with MasterCard and Maestro-branded debit and consumer credit cards in the European Economic Area (EEA) violate rules on restrictive business practices. MasterCard must comply with the order to withdraw its MIF by June 2008 or face the possibility that the EC may impose daily penalty payments of 3.5 percent of its daily global turnover in the preceding business year.

The EC’s ruling came after a four-year investigation by the EC which first sent MasterCard a statement in October 2003 detailing its concerns that its MIF were too high and lacked transparency. According to the EC MasterCard’s MIF applies to virtually all cross-border card payments in the EEA and to domestic card payments in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxemburg, Malta and Greece. About 45 percent of all payment cards in the EEA either bear a MasterCard or a Maestro logo.

MIF not illegal

According to the EC, MasterCard’s MIF charged on each MasterCard debit card payment at a merchant outlet ranges between 0.4 percent of the transaction value increased by €0.05 ($0.075), 1.05 percent increased by €0.05 for payments with Maestro debit cards, and between 0.80 percent and 1.20 percent for transactions with MasterCard consumer credit cards. Fees are retained by the issuing (customer’s) bank and charged to the acquiring (merchant’s) bank which then takes this cost element into account when setting its prices to merchants.

The EC stressed that while MIF are not illegal an open payment card scheme such as MasterCard’s MIF is only compatible with EU competition rules if it contributes to “technical and economic progress and benefits consumers”. However, the EC concluded that MasterCard submissions that included an oral hearing in November 2006 had failed to submit the required empirical evidence to demonstrate any positive effects on innovation and efficiency which would allow passing on a fair share of the MIF benefits to consumers.

lateral interchange fee agreements such as MasterCard’s inflate the cost of card acceptance by retailers. Consumers foot the bill, as they risk paying twice for payment cards: once through annual fees to their bank and a second time through inflated retail prices paid not only by card users but also by customers paying cash. The Commission will accept these fees only where they are clearly fostering innovation to the benefit of all users.”

In its conclusion the EC stressed that the MasterCard decision will support the creation of the Single Euro Payments Area (SEPA) by fostering greater competition in the cards market and preventing an artificial increase of merchant fees due to an “illegal pricing mechanism” such as MasterCard’s MIF.

A warning from MasterCard

MasterCard is not taking the situation lying down and has announced that while it will comply with the EC’s decision it will appeal against the ruling. Its appeal looks set to be founded on the benefits of allowing market forces to dictate the setting of interchange fees and the damage to consumer choice and innovation in the payments industry regulatory intervention may cause.

“We are disappointed that after years of review of MasterCard Europe’s transparent, default cross-border interchange fees, the Commission failed to appreciate that without a mechanism to fairly share costs among all the participants in a payment system that functions across Europe and around the globe, consumers will be hurt,” said MasterCard Europe’s president Javier Perez.

He continued that forcing drastic reductions in interchange fees across Europe could delay implementation of SEPA, reduce incentives for payment institutions to expand into new domestic European payments markets and lead to cutbacks on necessary investments in new services and technology.

MasterCard also stressed the example set by Australia, the only other jurisdiction in the world that regulates interchange fees. “The Commission has also ignored the experience in Australia where regulators forced down interchange fees, resulting in higher cardholder charges, reduced card features and benefits, less competition, and diminished investment and innovation,” said Perez. “Not surprisingly, the Australian payment card business has seen slower growth since regulation was introduced.”

Visa’s position vague

MasterCard’s stance received the full backing of the American Bankers Association, the industry body’s president and CEO Edward Yingling terming the EC’s decision disappointing and failing to take adequate account of the benefits that retailers receive from the worldwide card payment system. Yingling also pointed to the negative impact of arbitrary limits on interchange fees in Australia.

MasterCard noted that the EC’s order appears to call for an even greater reduction in interchange fees than occurred in Australia.

Visa’s position following the EC’s ruling on MasterCard’s MIF is unclear. In 2002 the EC approved Visa’s MIF system for a limited period following Visa’s offer of substantial reforms including a progressive reduction in fees from an average of 1.1 percent to 0.7 percent. However, on 1 January 2008 Visa became, as the EC termed it, “responsible to ensure that its system is in full compliance with EU competition rules.”

What the rules are, are however unclear as far from the EC’s ruling against MasterCard providing clarity its decision has left the entire payments industry in doubt as to what interchange fees the Commission will allow, said Perez.

Addressing a media briefing Kroes said Visa’s fee structure would be re-assessed.

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